It’s safe to say the markets are jittery ahead of tomorrow’s Federal Reserve rate hike decision and commentary. 😨
We all know a hike is coming, but it’s unclear how big it’ll be. 🤔
As of today’s close, market participants seem to think a 75bp hike is coming tomorrow, even though the Fed has communicated that it was unlikely. The CME’s Fed Fund Futures tool shows the market is now pricing in a 97.9% chance of a 75bp hike, even though just last week it only assigned a 3.9% probability to that scenario. 🔮
A lot changed after last week’s red-hot inflation prints in the U.S. and Europe, with many suggesting that the data leaves the Fed no choice but to act aggressively. Also, today’s data showed that the Producer Price Index, a measure of wholesale prices, rose 10.8% YoY in May. 🔥
Since the inflation data remains hot, the bond market continues to front-run the Fed. Treasury yields raced to new cycle highs along with the U.S. Dollar, while stocks flirted with their year-to-date lows.
While market participants can’t seem to agree on the Fed’s next steps, the recent price action suggests that the “inflation has peaked” narrative is now a minority view.
Volatility is likely to continue up to tomorrow’s 2:00 pm ET announcement and through the rest of the week, as we typically see around big policy decisions.
In addition to the rate decision at this meeting, the market will be listening closely to the Fed’s commentary on how they plan to move forward at future meetings. 👂
What do you think is the Fed’s next move? Join the streams and let us know your thoughts! 💭